Treasury lifeline lets GMAC lower bar on car loans

Bloomberg News |
December 30, 2008

GMAC LLC, bolstered by a $6 billion federal bailout, resumed lending to General Motors Corp. customers with lower credit scores as the U.S. stepped up efforts to keep the automaker in business.

The Treasury said Monday it will take a $5 billion stake in Detroit-based GMAC, the financing arm of GM, and lend $1 billion to the automaker that will be invested in GMAC to boost its capital. Within hours, GM was offering five-year, no- interest loans to halt this year’s 22 percent slide in sales, which dealers have blamed on a lack of financing for customers. Reviving GM’s sales has become a priority for U.S. policy makers including the Federal Reserve because of concern that the automaker and its suppliers might go bankrupt and deepen the year-old recession by firing millions of workers. The funds for GMAC are on top of $13.4 billion the Treasury agreed earlier this month to lend to GM and Chrysler LLC. “The economy has stopped on a dime, and the Fed is looking anywhere there are large markets they can affect in big ways,” said Greg Prost, chief investment officer at Ambassador Capital Management in Detroit, which manages about $800 million. “If they are going to save the car companies, there is going to have to be financing.” GMAC will now lend to vehicle buyers with credit scores of 621 or higher, compared with a previous standard of at least 700, according to a company statement. The higher threshold had excluded about 42 percent of U.S. consumers. The company said it won’t finance “higher-risk transactions,” instead concentrating on prime customers who are more likely to repay using “responsible credit standards.” The relaxed policy “will allow us to return to more normal levels of financing volume, and should help in efforts to stabilize the U.S. auto industry,” GMAC President Bill Muir said in today’s statement. The lender financed about 35 percent of GM’s retail customers and about three-quarters of dealer inventory last year. GM, which sold 51 percent of GMAC in 2006 to a group led by private equity firm Cerberus Capital Management LP, is seeking a permanent federal bailout to avert bankruptcy. Cerberus also owns Chrysler. “The relationship with GM is probably a key reason it’s being bailed out,” said Thomas Atteberry, who helps manage $3.5 billion in fixed-income assets at First Pacific Advisors in Los Angeles. “I’m not very happy about the fact that the government has to save an auto-finance company because management ran it into the ground.” GMAC ran short of cash this year after $7.9 billion of losses over five quarters, mostly from record defaults on subprime mortgages, which are made to homebuyers with the worst records. The lender was shut out of credit markets and had to limit lending only to people with the top repayment histories, a policy that GM dealers said had cut deeply into sales. “Bringing back loans is going to help tremendously, certainly with the perception of GM’s stability,” Mike Deichmann, owner of Trent Cadillac-Buick-Pontiac-GMC in New Bern, N.C., said in an interview. “These are all positive steps to get people to buy again, to visit the showroom.” GMAC’s 8 percent bonds due in 2031 jumped 6.75 cents to 54.75 cents on the dollar to yield 15.1 percent at 1:09 p.m. in New York, according to Trace, the Financial Industry Regulatory Authority’s debt-pricing service. The bonds, which traded at a low of 25 cents on Nov. 24, have jumped 21.75 cents since the Fed on Dec. 24 said it had approved GMAC’s bank holding company application. GM’s stock rose as much as 11 percent in New York Stock Exchange composite trading. GM’s $1 billion loan from the Treasury would be used to support a GMAC rights offering, which is designed to help the lender bolster its balance sheet. The loan may be completed by about Jan. 16, the Treasury said. The agreement opens a new rescue program for the car industry as part of the Treasury’s $700 billion Troubled Asset Relief Program. The bailout, originally designed to buy soured loans and securities from banks, has since become a tool for Treasury to prop up lenders, insurers, carmakers and now auto- finance companies. The investment in GMAC is “part of a broader program to assist the domestic automotive industry in becoming financially viable,” the Treasury said in a statement Monday. GMAC will pay an 8 percent dividend on the Treasury’s $5 billion of senior preferred equity. The company will also issue warrants in the form of additional preferred equity that will equal 5 percent of the preferred-stock purchase and pay a 9 percent dividend if exercised. The Bush administration has already agreed to loan GM $4 billion this month and $5.4 billion next month. If Congress agrees to approve funding of a second $350 billion for TARP, GM may get another $4 billion in February. A Treasury official said there is no cap or deadline for aid for the auto industry under TARP. Congress “will need to release” the second half of the $700 billion under the Treasury’s rescue plan, the official said on condition of anonymity during a conference call with reporters. The announcement left unresolved the status of GMAC’s $38 billion debt swap, another change designed to reduce the lender’s obligations and help it qualify to convert to a bank. GMAC didn’t say Monday whether it had reached the goal of 75 percent participation, only that it has accepted all bonds tendered in the swap and that results were still being tallied. “Once the offers are settled, which we expect to do promptly, results will be disclosed,” GMAC spokeswoman Gina Proia said in an e-mail. GMAC originally said it couldn’t become a bank without a successful debt swap. The Federal Reserve subsequently approved GMAC’s application to become a bank holding company last week, and GMAC said Monday that the Fed’s approval didn’t hinge on completing the debt swap. GMAC will “continue to pursue” other ways to boost liquidity, including applying for a Federal Deposit Insurance Corp. guaranty program and attracting retail deposits from consumers, said Toni Simonetti, a spokeswoman for GMAC. The collapse of GMAC would leave GM at risk of losing as many as 40 percent of its 6,500 U.S. dealerships, Martin NeSmith, a liaison to the lender as a member of GM’s National Dealer Council, said Dec. 10. The dealerships rely on GMAC to finance cars and trucks on their lots while they wait for consumers to buy them. With GM selling cars at the slowest pace in 26 years and the country in its worst housing crisis since the Great Depression, GMAC and its Residential Capital LLC mortgage unit have had no way to revive their own revenue. ResCap has faced speculation about bankruptcy, and GMAC didn’t say how the federal aid program would affect the unit. Management of Cerberus includes former Treasury Secretary John Snow, who is chairman of the New York-based private-equity firm. That poses a potential conflict of interest in a Treasury Department rescue of GMAC, said Josh Lerner, a Harvard Business School investment banking professor. It’s countered by the need to help GM, Lerner said. “You can criticize the whole bailout process for a lack of transparency and this is no exception,” Lerner said. “On the other hand, it’s widely accepted that saving GM is an important public policy goal, at least in the short run.”